FMCG

by Greg Thain

  This being the case, it is not surprising that Heinz has laid out a much more focused strategy than had previously been the case:

  · Our predominant focus is on driving continued global growth in Ketchup and Sauces, our largest core category with sales of more than $5 billion.

  · We are using our advantaged, well-balanced geographic portfolio, led by our accelerating growth in emerging markets

  · We are building and increasingly capitalizing on unique global capabilities and infrastructure to support continued growth and improved productivity.

  This can be paraphrased as:

  · Sell more ketchup and soy sauce . . .

  · . . . In Emerging Markets . . .

  · . . . Which is where we will invest . . .

  · . . . Developed Market business units need to cut their costs.

  And who can really argue with this? Consumer markets are becalmed in the developed world. Heinz’s US business is 40% frozen meals and snacks where they have no structural advantage, so it is no surprise they are cutting back, exiting the Boston Market and subsequently the TGI Friday’s franchises, closing factories and even downsizing the Long Fong business in China. One might well ask why they stay in the frozen foods business at all. Baby food is a strong category for Heinz in emerging markets, and a good one in which to build and enhance the Heinz brand name. But it is going nowhere for them in developed, as birth rates fall off the chart and competition is fierce (Heinz are global number 3 in prepared baby food).

  On the Ketchup and Sauces side, life is currently tough in developed markets due to the economic conditions, so Heinz’s innovation is more aimed at new packaging formats to hit lower price points in value-driven channels, such as their 10-ounce ketchup pouch priced at $1. Food service, 30% of US sales, is probably more of a necessary evil than an engine for growth in ketchup.

  However, in emerging markets they can barely keep up with demand – Heinz Ketchup began manufacture in Brazil in 2012 – and their soy sauce brands are doing equally as well. Emerging markets account for 7 of the top 10 markets for Ketchup and Sauces, where Heinz is very well positioned. Globally the Ketchup and Sauces category is colossal, valued at $110 billion and is highly fragmented. Heinz, number two globally, have less than 5% share, so the potential is enormous. It is their highest margin business and the only one where they are structurally advantaged. They are developing their expertise base away from Pittsburgh by building innovation centres for ketchups and sauces in Europe with one to follow in Asia.

  The time is right for Heinz to get back to doing what their founder set up to do: selling meal-enhancing ketchups, condiments and sauces, but this time to everyone on the planet.

  Henkel

  Where Did It Come From?

  Friedrich Karl Henkel, known throughout his life as Fritz, first developed an interest in industrial chemistry when he joined a paint and varnish firm as a trainee at the age of seventeen. Seven years later, in 1874, he left to set up a chemicals and paint wholesaling business, Henkel & Strebel, where as a wholesaler he would have come into contact with many of the key German chemical industrialists. Only two years later, on 26th September 1876, he left wholesaling, teaming up with the two owners of a factory producing sodium silicate (water-glass) to begin manufacturing a new kind of detergent largely based on the product. The new firm, Henkel & Cie, of Aachen in the Rhineland, took the radical step of actually packaging its new product, in contrast to its competitors who supplied retail outlets in bulk; the retailers ladled or poured out themselves, in the store.

  Two years later, having bought out his two partners, Fritz himself developed a new product, Henkel’s Bleich-Soda, a bleaching agent made from water-glass and soda, which he launched as Germany’s very first branded detergent. But he soon realised that sleepy Aachen was a bit off the beaten track for reaching the burgeoning industrial towns of the Ruhr, so in that same year he relocated to Düsseldorf. Sales of Henkel’s Bleich-Soda rocketed and Fritz outgrew his rented factory within a year. So he built his own and linked it directly to the main rail network.

  By 1883, Fritz had his own salesmen on the road. But he was struggling to cope with the costs of a dedicated sales force. So, drawing on his wholesaling experience, he decided to spread the fixed costs across a broader product range, and set up as the agent for a range of products: an ultramarine dye, starch, beef extract and a hair pomade. This mixed bag, he reasoned, would pay for the extension of his own brands but could be dropped progressively as and when his own sales grew. The practice of the time was that of roaming sales force, which took initial orders and nothing else. The customer himself had to contact head office for follow-up quantities. Fritz was having none of that. He organised a set of concentrated and well-defined sales districts in which customers were called on with what one supposes must be described as Teutonic regularity. This provided full sales coverage for all his products in 280 towns across the entire country.

  Rather than simply using wholesalers, Fritz had adopted this route for product sales, as he was a firm believer in keeping as much of his operation as possible in-house. He also applied this philosophy to the supply of his raw materials, buying the water-glass factory from his former partners and transferring the equipment to Düsseldorf. This was an independent streak that would indelibly shape the future direction of the company, although it threatened to get out of hand when he added Henkel’s Thee, Germany’s first branded tea, to the product list. The tea was eventually dropped in 1913, although at its high point it had produced more than 10% of sales.

  Fritz’s own water-glass was not just an ingredient for Henkel’s Bleich-Soda but could also be used as raw material for other industrial firms, which turned Fritz’s mind to the ever-increasing quantities of waste, primarily potassium, generated by the production process. In 1897, he created a potassium-based fertiliser, which he branded Martellin, which he sold to growers of tobacco, wine-grapes and hops, all products which conformed to the agenda of 19th-century hard-working Germans: sustainability. By the turn of the century, his three top sellers, Henkel’s Bleich-Soda, Henkel’s Thee and Martellin, plus industrial water-glass, topped one million marks, driven principally by an annual sale of ten million packs of Henkel’s Bleich-Soda. This mix of consumer and industrial products would remain a unique feature of the Henkel business model throughout its history.

  How Did It Evolve?

  Henkel the company stemmed directly from Fritz’s enduring interest in chemistry. He was an avid student of everything that was new in chemistry – globally, an early adopter, for example, of the Twitchell process for the hydrolysis of fats into fatty acids, which included the stearic and oleic acids used in detergent manufacture and their by-product, glycerol. But it was Fritz’s hiring of chemist Dr Hermann Weber in 1906 that sowed the seeds of his big breakthrough. Dr Weber’s task was to research the possible uses of oxygenated salts to act as bleaching agents when combined with soap. Until then, soap powders were just basically pulverised soap. The whiteness of the wash depended entirely on the physical efforts of the housewife. But combine a bleaching agent with the soap and the wash itself would do the work, obviating the need for separate rubbing and bleaching.

  Hermann’s appointment paid off almost immediately: the very next year there was a product to launch. Looking for a name, Fritz decided to combine elements of its two principal ingredients – perborate and silicate – and came up with Persil, which was launched on 6th June 1907 as the world’s first self-acting detergent. Since this saved countless hours of hard, physical graft, it is no surprise that Germany’s Hausfrauen fell over themselves to buy what really was a new and life-changing product. Within a year, Fritz had to increase his workforce by 50% and was scouring the world for automated packing machinery to turn out the first year’s 4,700 ton production.

  By 1909, Fritz was already looking to export his modern-day miracle to other European markets. Whilst a small market like Switzerland could be supplied from his own factory, the much larger Fre
nch and British markets could not. For France, Fritz concluded a licensing agreement with a local manufacturer, the Société d’Electro Chimie, but in England he was faced with an immovable object: William Lever and the colossal Lever Brothers, already a direct competitor in Germany and the last place Fritz wanted to leave the secrets of his new invention. And Lever was dangerously predatory, busily taking over most of his major rivals. Fritz had no intention of being taken over by anyone, and turned to the highly reputable firm of Joseph Crosfield & Sons Ltd, granting it the patent rights and trademarks of Persil for the United Kingdom and various British, Dutch and Danish colonies. He might have been better off spending time with a decent contracts lawyer, instead of rushing into the new markets as fast as he could. Within ten years, William Lever had bought both Persil licensees, plus the rights to the Persil brand in France, the UK and much of the British Empire. Fritz Henkel would forever regret losing control of a leading detergent brand in some of the world’s leading detergent markets.

  But this calamity was still ten years away. In the meantime, Fritz was wrestling with the twin challenges of building the Persil brand in Germany as quickly as possible and finding other ways to expand the business. In 1910, the waste product glycerol was turned into profitable us: Henkel built dedicated production facilities that would make him Europe’s largest producer of glycerine by the outbreak of the First World War. As glycerine was a key ingredient of dynamite and cordite, business boomed. By 1912, Henkel was churning out nearly 50,000 tons of product a year, of which, only five years after its launch, Persil contributed a massive 40%.

  Although Henkel was largely self-sufficient - Fritz’s insistence on controlling as much of his supply chain as possible - the outbreak of war, a British Royal Navy blockade and non-negotiable requisitioning by the German military machine did give pause for thought: sooner or later, supplies and raw materials might run out. Glue was deemed most at risk, so the Henkel laboratories, set up in the early 1900s, began experimenting with making adhesives out of their plentiful water-glass. In 1916, the raw materials situation tightened: government controls on the supply of fats meant that Persil had to be reformulated to a war-time, soap-free version. Production of the brand ceased entirely in 1918. The company immediately responded to this setback by launching Sil (No Per), a concentrated detergent and bleach product.

  Despite the cataclysmic scale of the First World War, however, the Henkel business remained remarkably unaffected. In 1917, the company was even able to make an acquisition, of the Matthes & Weber soda works, whose principal product it could vertically integrate into Henkel’s Bleich-Soda. Rather more difficult to deal with was the French occupation of the Rhineland, which put the main factory behind enemy lines. Henkel’s uncompromising solution was to build a new factory in central Germany, even though the company did not need the extra capacity, simply the access to its their main market. However, the increased capacity would prove very useful later on.

  By 1920, matters had largely returned to normal. Persil was back on the market in its original formulation and the product range was extended with Ata, a scouring agent designed to launch the company into household cleaning products. The next year, the venerable Henkel’s Bleich-Soda was given a friendly makeover by rebranding it as Henko, which heralded something new: an emphasis by Fritz on the importance of branding and advertising. In 1922, a new advertising campaign for Persil featured what would become an iconic German image for the brand, Die Weisse Dame (the White Lady), omnipresent on German advertising hoardings until well into the 1960s.

  In 1923, the French occupied of the Ruhr Valley. But this disaster for Germany was a blessing in disguise for Henkel. It forced the company to begin the manufacture of its own glue supplies. Excess product was sold to other glue-deprived companies. There was a ready demand. In fact, there was a ready demand in a high-potential market, particularly with decorators. So the company set about developing specifically targeted products, launching Henkel-Kleister-trocken (dry paste) in 1928 followed by Mala, a cold-water-soluble glue, a year later. Thus began what would become Henkel’s largest product category.

  A visit to the United States by Fritz’s son, Dr Hugo Henkel, introduced another ace to the deck. Henkel junior had become excited about the American use of phosphates for cleaning metal surfaces, so on his return, the laboratories immediately set about developing new products for industrial cleaning, duly launched under the brand name Pedrei. The same technology backed the household cleaner Imi in the first of what would be many crossovers from Henkel’s industrial division to consumer side of the business, a combination of branded industrial and branded consumer markets that would become an enduring Henkel trademark. Further good news followed. In 1927, a truce with Lever Bros. on the thorny issue of Persil rights was finally declared: Lever kept the brand for the UK, France and the two countries’ colonies while Henkel took the rest of the world. The fortunes of the Persil brand, along with its formulation and variants, now begin to diverge: each company developed Persil as it saw fit.

  Henkel, now run by Hugo Henkel, now began both to expand and to acquire. Expansion, through products of its own invention, saw it move into an increasing variety of consumer and industrial markets, whilst series of acquisitions to accelerate the process. Henkel bought floor polish and furniture polish companies, as well other German detergent manufacturers, including the makers of Germany’s first synthetic detergent, Fawa. The company was also rapidly developing new ingredients to improve its booming adhesives business and, as was the Henkel way, setting up factories to produce them rather than relying on outside suppliers. And once again, potential disasters turned into hidden benefits. When the National Socialist government put swingeing, impossibly restrictive new conditions on the production and use of fats and oils, Henkel to set up a whaling company and send the company fleet off to the Antarctic. Increasingly tight controls only fostered Henkel creativity. The times were difficult, yet the company made substantial technical breakthroughs on new adhesive compounds. Necessity was truly the mother of invention.

  But it could not quite match the next cataclysm. The outbreak of the Second World War saw both Persil and Fawa taken off the market and Henkel’s range - by now more than 200 products – was dramatically scaled back and reformulated. But acquisitions could still be made and the company’s laboratories still came up with new developments: methods of dealing with detergent-induced irritation in sensitive skin and specific synthetic detergents for coloured fabrics. Company involvement in new uses for cellulose, particularly in adhesives, was also growing very strongly. But the war had its way in some areas. Whilst the company’s factories suffered little bomb damage, much more disruptive was the occupation of the main Düsseldorf factory by the Americans and the outright confiscation of Henkel’s shiny new detergent factory in the Soviet occupation zone. And when the Third Reich did fall, almost the entire senior management team was interned.

  Family members and executives were released in 1947, to the shattering Allied announcement that 70% of Henkel’s remaining production capacity was to be dismantled, along with that of more than 900 other German factories. The family called in every favour they could, including some from key industry contacts in the US, managed to get most of their factories off the hit list and, with a mostly intact production and research infrastructure, wasted little time in getting back to business as usual. Perwoll and Lasil, its new synthetic detergents, were launched in 1949, the same year that Procter & Gamble’s Tide went national in the US. A year later, Henkel bought itself into hair colourants category and brought back Persil, now enriched with ‘optical brighteners’.

  In 1950, the company launched a new generation of synthetic resin-based adhesives that signalled the start of a very innovative decade for the adhesives product range, which would launch a multitude of targeted new products based on new technologies. Detergents saw similar progress, side with the launch of Pril dishwashing liquid in 1951, Fa soap in 1954, Dixan in 1957 (formulated for the new dr
um-style washing machines) and Persil 59 in 1959, the company’s first heavy-duty synthetic detergent. As well as developing new products, Henkel was exploiting new promotional styles. It ran West Germany’s first-ever television commercial for Persil. It was turning international too, expanding its reach into countries as far afield as Japan and Brazil. And it continued to research: much work was also being done on low-foam surfactants, which set Henkel on the path to industry leadership in the detergents of the future: biodegradables.

  How International Are They?

  Henkel’s remorselessly efficient march to global giant-hood began early: it opened an Austrian sales office in 1886. Three years later, orders were being taken in the Netherlands and Switzerland, soon followed by Italy and the UK. In 1913, the first foreign subsidiary was set up in Switzerland, a smart move: in neutral Switzerland business was conducted there unhindered for the duration of both sets of hostilities. By the end of the 1920s, the company was exporting to almost all European countries as well as Australia and South America. As the export trade grew during the early 1930s, business was sufficiently large for manufacturing subsidiaries to be set up in Norway, the Netherlands and Belgium and by 1937 Henkel owned production facilities in twelve European countries. Unfortunately for Henkel, all were expropriated or nationalised after the Second World War, forcing the company to start again from scratch.